Carbon tax cuts for all

Whatever you believe about climate change, a carbon tax is no reason to expand government, boost handouts or redistribute wealth.

If Australia ends up with a carbon tax, all the revenue must be returned to taxpayers. Bigger government retards efficiency and undermines individual freedom and responsibility.

Yet
Ross Garnaut
suggests less than 50 per cent of the $12 billion from a $26 a tonne carbon tax be used to cut taxes. He wants the rest to “assist" industry, boost welfare and subsidise “innovation" funds.

Industry should get little. As Garnaut rightly says, “Households will pay almost the entire carbon price as businesses pass carbon costs through to the users of their products."

Exporters can’t pass on extra costs so easily. Foreigners could buy from countries without a carbon complex. But Asia’s insatiable demand for our exports should grease the wheels of transition.

The money wasted on the Green Car Innovation Fund should be a red flag to pouring billions more into further “green research". Indeed, the departments of Climate Change and Innovation already have 3,200 bureaucrats and cost $5 billion a year between them. Perhaps they could make do with existing resources and companies could conduct their own research.

Initial increases in government pensions and allowances are not necessary either. The government does not bring forward indexation when Queensland weather unexpectedly plays havoc with fruit prices. Yes, price increases erode payment values, but automatic indexation occurs regularly. The age pension is even linked to the Pensioner and Beneficiary Living Cost Index, which reflects pensioners’ expenditure patterns.

Tax cuts have the potential to mitigate any damage a carbon tax may cause. Cutting tax encourages a virtuous cycle of work, enterprise and administrative efficiency.

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But Garnaut’s recommended cuts are neither fair nor affordable. Raising the income tax-free threshold from $6000 to $25,000, an idea from the Henry review, is laudable. But it would cost more than double the carbon tax revenue.

Garnaut’s solution is to raise taxes on those earning more than $80,000 a year by “adjusting thresholds and or rates". This is blatant, populist redistribution. All taxpayers would have to wear price increases; all should be compensated.

But Garnaut’s recommendations are a beacon of sense compared to the government’s likely proposals.

In 2008, he recommended that the Rudd government use revenue from its ill-fated carbon pollution reduction scheme for “efficiency-raising . . . reductions of distortionary taxes".

Yet the government’s measures were a “how to" guide in tax vandalism. It proposed increasing the pernicious low income tax offset, a poverty trap that burdens taxpayers earning up to $67,500 which the Henry review recommended be abolished, with 13 per cent higher effective marginal tax rates. It planned to boost pensions and allowances by roughly twice the predicted price increases. Perhaps worse, the government wanted to increase family payments, preferring to entrench dependency rather than let people choose how to spend their money.

I do not expect the Gillard government to show much more sense. Using any carbon tax revenue to increase the tax-free threshold ($14,000 might be affordable) is tempting. It would return about $1200 a year to most workers – and proportionately most to those who pay the least tax.

But unless any higher tax-free threshold is indexed, the increase is gradually whittled away by inflation. Moreover, $12 billion is not enough to lift the tax free threshold above the level of government pensions. Welfare payments would continue to overlap with tax system.

Cutting rates of income tax is a better way to return revenue to workers. Rate reductions are immune to inflation and difficult to reverse. Moreover, unlike increasing the tax-free threshold, cutting rates makes extra work more attractive.

Mooted carbon tax revenue would provide enough money to shave a few percentage points off the 15 per cent or 30 per cent marginal income tax rates, say, which affect the majority of Australians’ work decisions. Alternatively, the government could abolish the deceitful Medicare levy.

The tax on carbon dioxide is supposed to alter behaviour and reduce emissions, not redistribute income. Pitting Australians against each other corrodes respect for public policy. One big tax cut for all would be far easier to sell than a smattering of subsidies, handouts and redistributive sleight of hand.

Treasury analysis shows Australia, surrounded by low-tax Asian competitors, already has one of the most progressive income tax systems in the OECD. It also shows the Australian government relies heavily on income tax, which punishes saving, and avoids consumption tax.

It is ironic that a Labor government is hankering to impose a tax that mimics the effect of a GST. Indeed, necessities like food, which even the ineffable GST cannot touch, would be certain to become more expensive under any carbon tax.